If you were to sit down and write a wish list for the perfect country to invest in just now, it might go something like this.
Given all the fears over the Eurozone sovereign debt crisis, you’d want to be sure the country wasn’t on the verge of going bust. Indeed, it might even be running a budget surplus.
And unlike the Bank of England, this country’s central bank would care about tackling inflation, so you could be sure that the currency and your investment wouldn’t be devalued.
Of course, its economy would be growing strongly. But unlike Australia, say, it wouldn’t be overly dependent on raw material exports to the detriment of everything else.
Sounds like a tall order. Yet this financial nirvana actually exists.
So today, we’re going to talk about how to invest in Sweden.
What Sweden and the UK have in common
In some ways, Sweden is like the UK. It has its own currency, the krona (whose foreign exchange code is SEK), yet it’s still part of the EU.
Sadly for us, the similarity ends there.
Consumer prices in Britain are climbing at either 4.5% or 5.2%, depending on which cost of living measure you look at. In Sweden, inflation is only just above 3%.
The faster rise in UK inflation is partly down to the pound. Sterling has been one of the soggier global currencies, which has pushed up the cost of our imports.
But there’s supposed to be a flip side here. A weak exchange rate cuts the cost of a country’s exported goods. In turn, that ought to boost export growth, which should eventually turn a trade deficit into a surplus.
For Britain, it hasn’t worked out that way. Despite the pound being quite weak, our trade deficit came in at ÂŁ7.4bn in April. That was a little better than expected, but hardly anything to cheer about.
The contrast with Sweden couldn’t be starker. Unlike the Bank of England, Sweden’s central bank – the Riksbank – does worry about inflation. So it has raised its benchmark interest rate six times since July 2010 to the current 1.75%.
Meanwhile the Swedish krona has soared by about 30% against the dollar in the past year. That makes it the second-strongest performing currency in Europe behind the Swiss franc.
Yet has this totally crushed Sweden’s trade position? Hardly. By making Swedish goods pricier, that krona strength is having a little bit of an impact. The country’s trade surplus fell from SEK10.1bn in March to SEK5.8bn in April.
But this was still higher than last year’s SEK5.6bn. What’s more, over the last 12 months, Swedish exports grew by 17% compared with a 14% increase in imports.
The secret of Sweden’s success
Impressive stuff. And it points to the next difference between Sweden and Britain. Over here, the economy is struggling to record much growth at all. GDP has been broadly flat over the last six months.
Contrast that with Sweden. GDP growth did slow in the first quarter of 2011. But the country’s output still grew by 6.4% compared with the year before.
So what’s the secret of Sweden’s success? In short, it has a great set of exporters. These now account for about 50% of GDP.
In the middle of the Great Recession, manufacturers worldwide had to compete hard for orders. At the time, the krona was weak. Sweden’s exporters cashed in on this, winning many pitched battles for business and raising their global market share.
Sweden’s firms are also making exactly the sort of industrial and capital goods that developing economies want, successfully tapping into Asian and Latin American demand to counter sluggish trading in Europe.
That’s been good for share prices. For example, the world’s largest ball-bearing maker SKF (SEK: SKFB), which we tipped a year ago, is since up by 40% in sterling terms.
All the signs are that Sweden “will continue to see broad-based growth… spurred by exports… households and the public sector”, says Annika Winsth at Nordea Bank.
Which brings us to Sweden’s budget deficit (the excess of government spending compared with its tax take). Or rather, it doesn’t.
By keeping tight control over the purse strings, Sweden managed to wipe out its annual deficit last year. Last month the government released much more bullish forecasts for 2011. It now expects both better economic growth and also, would you believe, an actual budget surplus for this year. In other words, the country will rake in more in tax than it spends.
Finance ministers around the globe must have gone green with envy about that one. No wonder Sweden can borrow more cheaply – or could if it needed to – than both Germany and the US.
So how can investors cash in on Sweden’s ongoing success?
The iShares MSCI Sweden Index Fund (NYSE: EWD) invests in mainstream Swedish stocks. It trades broadly in line with net asset value and the annual expense ratio is 0.55%. The price in pounds is up just under 5% since we tipped it last December, which is clearly better that the 1% rise in the FTSE 100 since then. But the high-quality Swedish story means there should be plenty more to come.
Category: Market updates